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The story of Swiss watchmaking

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 The story of Swiss watchmaking
Nikola Draskovic
Algebra University College, Croatia

Milivoj Markovic
Rochester Institute of Technology, Croatia

Abstract

This paper aims to provide a historical overview of the Swiss watch industry's main
challenges and responses over the past fifty years and how it maintained its leading
position until recent times. Back in the 1970s and 1980s, the whole industry reached the
point of near extinction due to managerial stubbornness and failure to respond to the
disruptive technological threat. East Asian producers flooded the market with
inexpensive watches based on the quartz movement (a technological innovation at the
time), creating a massive challenge for the Swiss watch industry and its traditional
approach to the production and marketing of watches. Building on the vision of
entrepreneurially-minded outsider Mr Nicolas G. Hayek, the Swiss watch industry
responded to the challenge confronting it by accepting the disruptive technology (quartz
movement) in a range of watches, next to keeping the traditional ones. A new watch
brand Swatch emerged out of the crisis, along with a radically new business model. The
following decades were the years of growth, but the global crisis in 2008/2009 took
another toll on sales of Swiss watches. As the global markets recovered, the sales
recovered again. The déjà vu feeling is pervading in Swiss watch industry executives
again these days as the Swiss watch industry is confronted with a new set of
challengers, armed with a new type of disruptive technology. In the early and mid-2010s,
smartwatches appeared on the market as the latest technological innovation. In 2016,
the smartwatch shipments exceeded the whole Swiss watch exports, while in 2019,
Apple watch sales outperformed the entire Swiss watch industry output. Despite several
smartwatch models introduced by Swiss brands, the customers turned away from
traditional producers. They embraced new players in the market, such as Apple,
Samsung and various other low-price competitors. This paper explores the options that
Swiss watch industry has in responding to new challenge(r)s, especially drawing from
the lessons learned throughout the previous disruption cycles.

Keywords: Swiss watch industry, business history, market dynamics, competitiveness,

technology strategy, smartwatch

Introduction

Although widely considered a producer of high-quality watches, the Swiss watch industry
faced many challenges throughout history, reaching even the near-extinction point.
Threats from competitors and technological substitution were the most significant ones.
However, time and again, the Swiss watch industry proved its robustness and
preparedness for strategic shifts and business model improvement. In the past, the
biggest challenges for the Swiss watch industry originated from other watchmakers
representing direct competition. New, disruptive technology in the form of a quartz
movement represented a considerable threat to the conservative Swiss watch industry.
In recent years, the competitive environment changed, together with the evolution of
functions and benefits a watch can provide. Namely, the emergence of the smartwatch
concept as an extension of smartphone technology completely redefined user
expectations. For smartwatch users, a timekeeping function is of secondary importance,
while the focus is on additional capabilities and features, such as connectivity with a
smartphone, fitness tracking, availability of dedicated apps, and smartphone notifications
display. Consumer electronics giants, such as Samsung, Huawei and Apple, dominate
the smartwatch market. The Swiss watch industry tried to join the smartwatch wagon,
but without an apparent success up to this point.

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This paper aims to provide insight into the current dynamics of the Swiss watch industry
and their strategies aimed at the threats generated by smartwatch offerings and changes
in user preferences. In order to provide a robust interpretation of the current events, a
historical research method is applied. According to Lune and Berg (2017, p. 185),
historic research is “a method for discovering, from records and other accounts, what
happened during some past period”. Historic research enables a better understanding of
a discipline by understanding its origins and patterns of change (Savitt, 1980). It is a
research method that studies relationships between issues that have influenced the past
and the present and will definitely impact the future (Glass, 1998). Therefore, the paper
provides a historical overview of the Swiss watch industry, focusing on specific critical
events that shaped the industry. Disruptive technologies have already provided
significant lessons to the Swiss watch industry, resulting in a certain level of strategic
adjustments to respond to competitors. The main question this paper is trying to answer
is can the Swiss watch industry reinvent itself once again to respond to disruptive forces
of technological innovation underpinning the emergence and growth of smartwatches.

Background: The beginnings of timekeeping and watchmaking

The beginnings of timekeeping have roots among ancient civilisations. The first
representation of timekeeping or time measuring intentions were various versions of
shadow clocks measuring the position of the sun and sundials (Major, 1998). According
to Encyclopaedia Britannica (2019), a sundial is a device "which indicates the time of
day by the position of the shadow of some object exposed to the sun's rays", with the
first examples dating from about 3500 BCE. Since the sundials were only able to show
time during nights, a further iteration of timekeepers was the water clock consisting of
marked containers filled with water that dripped out, with the declining water level
indicating the time that passed (Batt, 2017). The next timekeeping device was an
hourglass that functioned on a similar principle, just replacing water with more reliable
sand. Another ancient timekeeping invention was the Chinese incense clock, which was
mainly developed for religious purposes that indicated time with the burning of differently
scented incense to mark different hours (Pagani, 2001). These clocks shared similar
principles with candle clocks that indicated passing the time with the wax candle shrining
while burning (Asser, 1983).

Astrolabes were quite sophisticated devices with geared mechanisms that represented a
handheld model of the universe. First versions are credited to the Ancient Greece
inventors who used them in astronomical observations and could conduct specific
astronomical calculations (Lewis, 2001). For example, Persian astrolabes originating
from the 11th century were capable of measuring time and acted as a calendar while
also depicting lunar phases (Hill and al-Hassan, 2002).

Although Switzerland is nowadays considered a traditional watchmaking country, the

roots of portable mechanical watch production can be found in Germany at the
beginning of the 16th century. With the development of a coiled spring By Peter Henlein
of Nüremberg, watchmakers could focus on size reduction, which led to the introduction
of portable watches (Woodring, 1929). Before that, people used different types of
timekeepers, such as sundials and water dials, while the first watches using gears were
created around the start of the 14th century (Chazanow, 2019). England was another
vital producer of watches in the early years, with several watchmaking centres. Roots of
English watchmaking can be traced back to the 16th and 17th centuries, when some of
the first technological advances contributed to skilful English artisans were recorded
(Kelly and Ó Gráda, 2015). During the 18th century, England led European watchmaking
with quality products of high complexity and exports reaching the Ottoman Empire and
China (Davis, 2022). English watchmakers managed to sell abroad around 200,000
watches annually during that period of time (Bezemore, 2019). Nevertheless, English
watches were highly esteemed by the users and also highly priced (Industries: Clock
and watchmaking, 1911).

As the English watchmakers improved their watchmaking skills, they were able to
produce more and more complex movements, together with more luxurious cases.
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Consequently, English made watches increased their price point, making them less
affordable. This development emerged as an opportunity for cheaper exports. After
centuries of world dominance, the English watchmaking industry started to decline after
its domestic market became flooded with smuggled cheap Swiss watches of decent
quality (Davis, 2022). Another blow to the once esteemed industry has been made from
mass-produced and lower quality but cheap American watches that started to pour in
during the mid-19th century (Kelly and Ó Gráda, 2015).

Several inventions contributed to the technological advances in watchmaking during the

17th and 18th centuries. For example, the French watchmaker Jean-Antoine Lépine
invented a simplified thin movement with bridges, which allowed watchmakers to
produce thinner watches (Gomelsky, 2014).

Rising of the Swiss watchmaking

The origins of Swiss watchmaking are related to protestant Huguenots fleeing

persecution in France who found retreat in Geneva in the 16th century (Donzé, 2015).
Over the years, they manage to transform the city into a cradle of watchmaking. With a
lack of raw materials, long winters and limited agricultural capabilities, Switzerland had a
natural predisposition for the development of watchmaking. During the winter months,
Swiss peasants and farmers were occupied with the production of components for watch
manufacturers based in Geneva (Gomelsky, 2014). This business policy of sourcing
components from external producers has been known as the établissage system. Briefly,
this system comprises an établisseur, an intermediary, and a number of subcontractors
producing specific watch parts used for watch assembly by watch manufacturers
(Donzé, 2015). The établissage system dominated Swiss watch manufacturing until the
end of the 19th century (Watch Wiki, 2022).

Another shaping force of the Swiss watchmaking is related to the introduction of luxury
laws (1566) restricting the wearing of jewels and banning the production of religious
items such as crosses and chalices (Donzé, 2015). Due to these restrictions, goldsmiths
and jewellers shifted their activities into watchmaking (Federation of the Swiss watch
industry, 2022). However, the Swiss watchmakers were not considered technological
leaders back then. Dutch, German, French and English watchmakers were responsible
for most watchmaking technology advances in the 17th and 18th centuries (Gomelsky,
2014). However, the Swiss watch industry soon emerged as the main challenger of the
Great Britain watch industry (Donzé, 2015). While in 1800, both England and
Switzerland each produced approximately 200,000 watches, by 1850, the Swiss
watchmakers' output reached 2.2 million, while British output had virtually no increase
(Gomelsky, 2014). Nevertheless, the quantity did not follow the product quality back then
(ibid).

Due to the établissage system and division of labour, component producers became
highly specialised in producing specific parts, which led to quality improvement over
time. High demand for relatively cheap Swiss watches within British and American
markets resulted in a further increase in production capacity. Interestingly, instead of the
industrialisation of Swiss watch manufacturing, the production specialisation went further
with even more fragmented activities (Donzé, 2015). The specific operations needed to
produce a watch rose from 54 to around 100 between 1830 and 1870 (Fallet-Scheurer,
1912).

Although Swiss watchmakers were not initial technology leaders, focus on product
quality and technological improvement increased over time. An excellent example of the
Swiss watchmakers' ingenuity is the case of the tourbillion invention. Probably one of the
most complex watch mechanisms, the tourbillion was patented by Abraham-Louis
Breguet in 1801 (Swatch Group, 2021). The technology introduced by tourbillion
managed to reduce the impact of both gravity and shaking on the accuracy and
performance of a watch (ibid). Another good example worth mentioning is the invention
of the pendant winding watch by Adrien Philippe in 1842 (Federation of the Swiss watch
industry, 2022).
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By the 1910s, the Swiss watch industry started to dominate the world market
(Knickerbocker, 1976). The Swiss watch industry managed to achieve a high level of
technological development, leading to superior manufacturing competency, high product
quality, and astonishing attention to visual details of a watch (Glasmeier, 1991). On top,
the traditional vertical integration of the Swiss watch industry and the sheer quantity of
produced watches resulted in economies of scale and low cost. Besides technological
and production advances, the Swiss watch industry recognised the need for
differentiation. In the early 1900s, the "Swiss made" brand emerged as a symbol of
technical quality and aesthetics (Mudambi, 2005).

During the 1910s and early 1920s, a significant shift from traditional pocket watches
toward wristwatches began due to necessity and fashion. Although the watchmakers
crafted the first wristwatches during the eighteenth and nineteenth century, they were
worn mainly by women, while later, their popularity also increased among men
(Boettcher, 2022). As a transitioning solution, a wristlet or wrist strap has been invented.
Due to its design, it enabled wearing the traditional pocket watch around a wrist. The
wristwatch, much in a form as it is today, has been designed and patented by a Swiss
watchmaker Dimier Frères & Cie in 1903 (Batt, 2015). Furthermore, World War I soldiers
began to modify their pocket watches by adding straps in order to be able to be worn on
a hand (Belcher, 2013). Apparently, it was impractical for soldiers to reach into their
pockets to check the time.

Traditionally, the Swiss watch industry comprised many traditional producers, such as
Vacheron Constantin, Hublot, Omega and Tissot. However, the Great Depression that
began in 1929 forced the Swiss watch industry to consolidate, resulting in many brands
in the industry joining one of the two newly formed conglomerates – SSIH (Société
Suisse pour l’Industrie Horlogère) founded in 1930 and ASUAG (Allgemeine
Schweizerische Uhrenindustrie AG) founded in 1931 (Mudambi, 2005).

By the late 1940s, the Swiss watchmaking industry dominated the market accounting for
up to 80% of the worldwide production (Glasmeier, 2000). Surprisingly, this growth of
Swiss exports occurred mainly during World War II, when the global trade routes were
significantly disrupted.

The traditionalism of the Swiss watch industry and the quartz crisis

During the mid-20th century, watchmaking progressed in productivity due to product and
process improvements and the introduction of the mass production system (Glasmeier,
2000). Consequently, producers were able to offer more affordable watches to the
market. However, the Swiss watch industry did not fully embrace these technological
advances, remaining focused on the cost-intensive manual production and the
établissage system (Donzé, 2014).

However, the traditionalism of the Swiss watch industry gained certain short-term
benefits, at least from the marketing perspective. During the mid 1960s, NASA
purchased a number of watches of different brands and put them on very demanding
tests to check their endurance and accuracy. Omega Speedmaster passed the tests and
became the official NASA watch for space flights and the first watch on the moon worn
by the Apollo 11 astronauts (Mazzardo, 2021). Although Swiss made remained as a
strong selling proposition, the world market started to turn towards cheaper US and
Japanese watches, which led to the decline of Swiss watches during the 1960s
(Mudambi, 2005). The negative trend will also continue in the following decade.

The quartz crisis refers to the Swiss watchmaking industry challenges resulting from the
emergence of inexpensive wristwatches with the quartz movement produced by the far
east competitors in the 1970s and early 1980s (Glasmeier, 1991). Although the Swiss
watch industry led the technological development of the quartz movement, it failed to
commercialise the innovation (Donzé, 2015). On the other hand, Seiko and other
Japanese watch producers rapidly embraced technological innovation resulting in the
global leadership in watch production (Glasmeier, 2000). Unfortunately, the Swiss watch
156
industry did not realise the actual threat level of inexpensive quartz watches. The
traditional and conservative Swiss watchmakers considered mechanical watches as the
only authentic watches and believed the customers would also continue to appreciate
the art of assembling 200-300 pieces into a mechanical watch movement (Dreifuss,
2011). However, the market reacted positively toward quartz watches, resulting in
declining figures for the Swiss watch industry (Donzé, 2015).

In 1979, due to the negative trends, both the Swiss government and Swiss banks
considered selling or even shutting down the watch industry and hired Nicolas G. Heyek
as a consultant to figure out how to carry it out efficiently (Pope, 2010). After a thorough
investigation of the industry, Hayek realised its inefficiency due to an inadequate
marketing strategy and lack of production automation (Dreifuss, 2011). Consequently,
Swiss watches were expensive to produce and unable to successfully compete with the
cheaper quartz watches originating from the far east. However, Hayek saw an
opportunity to revive the industry, starting with rationalisation and efficiency
improvement. Therefore, he proposed a merger of the two main Swiss watch
manufacturers, ASUAG and SSIH, which would reduce expenses (Pope, 2010). The
banks that hired Hayek accepted the proposal, and the merger took place in 1983
(Donzé, 2014). However, although the initial results of the merger were positive, the
banks decided not to completely follow the industry reconstruction plans, which allowed
Hayek to take a major stake in a newly formed entity, now called Société Suisse de
Microélectronique et d’Horlogerie (SMH), by buying a majority share in 1984 (Childs,
2010).

Hayek’s plan to revive the Swiss watchmaking was twofold. First, he decided to increase
the prices of luxurious brands, such as Omega, Longines, Tissot and Breguet,
emphasising the heritage of the Swiss watch industry (Donzé, 2015). Furthermore, he
positioned Omega as a high-end brand to directly compete with Rolex (Wegelin, 2010).
The second part of Hayek's strategy is related to the Swiss watch industry's response to
the lower end of the market threats by Far Eastern brands – Swatch. In order to enter
the price competition, the traditional model of Swiss watchmaking has to be changed.
Switching from metal casings to plastic ones, reducing the number of parts of the quartz
movement and improving the mounting of movements resulted in lower production costs
(Tushman and Radov, 2000). What brought about the re-emergence of the Swiss watch
industry through Swatch was both product innovation (a new design of a watch) and
process innovation (an automated manufacturing procedure that reduced the cost),
coupled with market repositioning of a product. Legacy brands were subsequently
repositioned as luxury items, rather than timepieces.

Swatch became a huge success. Instead of price competition with the Far Eastern
producers, Swatch reinvented the way how a watch should be considered. Following the
ideas and principles of fast fashion, Swatch introduced several regular and limited
collections that were intended to last for a short period of time until replaced with a new
collection (Draskovic, Markovic and Petersen, 2018). Binging the fun, Swatch became a
fashion item, rather than a timepiece. Nevertheless, Swatch also relied on the country-
of-origin effect, and the "Swiss Made" proved to be an asset for both differentiation and a
higher price point (Taylor, 1993).

With the Swatch covering the lower end of the market and a number of legacy brands
covering the mid-end and the luxurious market, the Swiss watch industry strongly
recovered from the quartz crisis in mid-1980s, with the continuous growth during the
1990s and 2000s (Donzé, 2014). Although the growth was quantitatively mainly driven
by low-end and mid-end wristwatches with quartz movement, since the 2000s, there has
also been a growing share of mechanical watches, both mid-end and high-end of the
market offering (Raffaelli, 2019).

157
Smartwatches and changing consumer trends challenge the Swiss watch industry once
again

The theory states that the decline in industry sales is primarily caused by two main
factors, technological substitution and change in consumer preferences (Grant, 2018).
By looking at the environmental factors that have impacted the Swiss watch industry in
the aftermath of the Great Recession, it would seem like a perfect storm in the making.
Younger generations of consumers are reportedly showing increased preferences
toward investing in experiential goods like travelling, rather than expensive material
possessions like luxury watches (Dalton, 2018). Facilitated through social networks,
experiential goods like travelling allows for more "bragging capital" than purchasing a
Swiss watch, and at a lower price next to it. Throughout the same time period, the
emergence and growth in sales of smartwatches have substantially impacted the sales
of Swiss watches. It sounds alarmingly that the Apple Watch alone has outsold the entire
Swiss watch industry in terms of the number of units shipped during the last quarter of
2017 (Strategy Analytics, 2020). This negative trend continued in the following years.
While Apple shipped around 22.5 million smartwatches in 2018, the entire Swiss watch
industry delivered 24.2 million watches in the same period (Tech Desk, 2020). In 2019,
Apple outsold the entire Swiss watch industry on the annual level, shipping 30.7 million
smartwatches, while the classic Swiss brands dropped to approximately 21 million units
(Sky News, 2020).

The smartwatch concept has been around for decades. Since the mid-1970s, watch
producers have been trying to enhance the timekeeping function of a watch with
computing capabilities, and one of the first calculator watches was the Calcron
introduced in 1975 (Gregersen, 2022). During the 1980s, several models with computing
capabilities were introduced, together with Seiko's RC-1000, with the capability to be
connected to the personal computer via a cable (Kakizawa, 1984). The technical
development continued in the following decades, but the smartwatch concept remained
a niche product with no actual demand for it (Dingle, 2013). The smartwatch category
received relevance and consumer interest once Apple entered the market with its Apple
Watch in 2015, which immediately increased the smartwatch market by around 460%
compared to the previous year (Thompson, 2018). Consequently, sales of Swiss
watches priced below CHF 200 sharply declined (Deloitte, 2017). Interestingly, the Swiss
watch industry failed again to detect the real threat from this new “quartz”. Deloitte
(2017) conducted research among the Swiss watch executives in 2017, and 72% of
them saw no threat from smartwatches or potential to make an impact on their sales.

From the technological aspect, a smartwatch is something quite different from a typical
Swiss watch. Smartwatch presents a technological convergence of functionalities packet
into a hand wearable device that looks like a traditional watch. Looking from the
performance side, smartwatch performance is measured across a number of
performance attributes that are incomparable to traditional Swiss watches. Starting from
the communication capabilities (email, phone…), entertainment capabilities (game
playing), navigational capabilities (built-in GPS), to plain and simple measurement of
time, smartwatches provide a distinctive experience for the user versus the Swiss watch
(arguably, the vice versa case applies as well) henceforth smartwatches present a
disruptive technological force negatively impacting sales of Swiss watches (an example
of technological substitution) (Tripsas, 1997). The additional feature of smartphones that
makes them increasingly valuable for consumers is their compatibility with a number of
other technological devices that create an ecosystem. Furthermore, smartwatches can
be perceived as minicomputers or smartphones scaled down to a size of a hand
wearable device. Their internal architecture resembles one of the smartphones, rather
than a traditional watch, despite the exterior casing similarity. Companies that are faced
with a technological substitution have a substantially harder time in adapting their
product to the challenger if the technology is at the architectural vs component level
(Grant, 2018). Finally, smartwatch manufacturers have extended their resources and
capabilities from other industries into the watch industry (related diversification in their
case), while Swiss watch manufacturers would have an impossible task of replicating or

158
transferring the capabilities of smartwatch manufacturers. Particularly faced with an
ecosystem of devices that technology companies have built over the last decade.

Nevertheless, the Swiss watch industry finally recognised the importance of the new
technology and, although quite late, decided to jump on the bandwagon. In 2020, Tissot
released T-Touch Connect Solar, the first Swiss made watch with a very low power
consumption and the capability to connect with smartphones to display notifications
(SWI, 2020). Considering the product specification, Tissot T-Touch Connect Solar is not
really a smartwatch comparable to Apple Watch or Samsung Galaxy Watch. It is more of
a hybrid concept where the quartz movement received a technological upgrade in the
form of connectivity. Other brands, such as Tag Heuer and Hublot introduced real
smartwatches based on the Google’s Wear OS (Android based) and Qualcomm
Snapdragon Wear processors. Despite not really being a Swiss made smartwatches,
their price points remain very Swiss. For example, Hublot’s Big Bang e with titanium
casing is priced at USD 5,200, while the model with titanium casing is priced at USD
5,800 (Lyles, 2020). While casing and the brand can just partially justify the price point,
Hublot's smartwatch is basically built around inexpensive non-Swiss made software and
hardware, making its price tag almost arbitrary (Barber, 2020). The only real exclusivity
of this smartwatch, besides the brand itself, is that it will be produced in a limited run.

Faced with the aforementioned threat of technological substitution and change of

consumer tastes across younger cohorts of consumers Swiss watch industry has found
itself faced with a familiar challenge of a technological threat. They responded effectively
to a threat half a century ago, but from the verge of extinction, will they be able to re-
bounce again, are they forced into being a luxury niche player, and what other options
remain?

Conclusion

Swiss watch industry is in the decline phase of industry evolution. The causes of the
decline can be attributed to technological substitution and changing consumer tastes.
This is not the first time that Swiss watch industry has found itself in this situation. Quartz
technology half a century essentially confronted Swiss watch industry with almost
identical challenges that the industry is confronted with today. How will Swiss Watch
Industry respond remains a question.

Continuing with the current strategy will short to mid-term undoubtedly lead to shrinking
revenues and profits with very uncertain future beyond this. Not responding to this threat
essentially means not having a strategy on how to respond effectively. This fatalistic
approach can lead to improvement sooner by chance than by design.

Responding to the challenge raised by smartwatch producers means to enter a

competitive fight where Swiss watch industry lacks many of the resources, and the ones
it has may prove to be superfluous. What options remain for the Swiss watch industry?
Will entrepreneurially minded visionary leader with knowhow and convincing influence
appear path a trail of resurgence for Swiss watch producers, or the answers lies in the
creation of frenemy relationships with key challengers?

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